The aranca-report-market-liberalization-in-saudi-arabia-opportunities-galore-for-foreign-investors-2014

aranca.com
Market Liberalization in Saudi Arabia:
Opportunities Galore
for Foreign Investors
2014

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Market Liberalization in Saudi Arabia: Opportunities Galore for Foreign Investors
Report Prepared by: Prahlad Bhanushali, Rishiraj Agrawal, Ati Ranjan

Contents
Multi-billion dollar investment opportunity in KSA 03
Importance of Saudi Arabia as an investment destination 07
Tadawul providing a level playing field among many G-20 economies 13
Other markets performed well after liberalization 19
Conclusion: Opening of market to lure huge foreign investments 23

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An Aranca Special Report 2014
Multi-billion dollar
investment opportunity
in KSA
In July 2014, authorities approved plans to fully open the Saudi stock
exchange (Tadawul) to foreign direct investments (expected by 1H 2015).
The move is believed to be a precursor to the much-coveted inclusion
of Tadawul in the MSCI EM Index (likely to take place in 2017). Following
the recent upgrade of the UAE and Qatar to emerging-market status, this
could enhance MENA’s visibility among global investors, increasing its
weightage to 5.35% (including Saudi Arabia’s 4%) vis-à-vis 1.35% currently.
Given the scenario, global portfolio managers are expected to allocate
around USD40bn to Saudi Arabia. In addition to passive investment, we
expect a lot of active money to begin flowing into the Kingdom, given the
fundamental strength of KSA’s economy and stock market.
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Saudi Arabia, the last G-20 country to open doors to foreign
investors
Saudi Arabia, the largest country in MENA by market capitalization and GDP, is the last
of the G-20 countries to open its stock market to full foreign participation. Except China,
where there is a cap on investments for Qualified Foreign Institutional Investor (QFII), all
other G-20 markets are fully open to foreign direct investments. Saudi Arabia’s market cap
to GDP ratio currently stands at 0.71, lower than the G-20 average of 0.79 and significantly
below that of the US (1.14), Japan (0.94), the UK (1.34), Canada (1.28), Australia (0.97), South
Korea (1.07) and South Africa (2.93). We believe opening doors to foreign investors would
bring the ratio closer to 1; our back of the envelope calculation indicates that deepening
of the market would mean more than USD150bn addition to market capitalization if the
MCap/GDP ratio improves by just 10 basis points.
0
3,000
10,000
20,000
USDbn
Figure 1: MCap to GDP ratio of just few G-20 countries greater than 1
Source: World Exchanges, IMF World Economic Outlook Database, April 2014
Inclusion in MSCI EM Index to attract significant inflows
Based on our preliminary calculations using funds benchmarked to the MSCI EM Index
and weightage based on market cap, we expect global portfolio managers to eventually
allocate about USD40bn to Saudi Arabia. According to the July 2014 MSCI EM factsheet,
funds aligned to MSCI indices totaled USD9trn. Considering the market cap approach
to calculate weightage, the MSCI EM has 12% weightage on MSCI; this translates to an
allocation of USD1trn. The MSCI Saudi Arabia Domestic Index has a free float market cap
of USD194bn from 45 constituents. Based on our calculation, this indicates roughly 4.7%
weightage on the EM Index; however, going by the market’s estimate, even if weightage
is around 4%, it represent a potential investment of around USD40bn.
Once included, Saudi Arabia would be among the top ten countries in the MSCI EM list of
23 nations, which is currently dominated by China (19.44%), South Korea (15.62%), Taiwan
(11.84%), Brazil (10.92%) and South Africa (7.51%).

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Figure 2: Expected structure of MSCI EM after inclusion of Saudi Arabia
Top country weightage in MSCI EM:
⊲⊲ China – 19.44%
⊲⊲ South Korea – 15.62%
⊲⊲ Taiwan – 11.84%
⊲⊲ Brazil – 10.92%
⊲⊲ South Africa – 7.51%
⊲⊲ India – 6.84%
⊲⊲ Russia – 5.40%
⊲⊲ Mexico – 5.12%
⊲⊲ Saudi Arabia – 4%
(expected)
FUND BENCH-
MARKED
INVESTMENTOPPORTUNITY
INSAUDIARABIA
WEIGHTAGE
ASSIGNED
Corpus allocation
to MSCI Funds:
USD9.0trn
MSCI Index Market
Cap: USD33.6trn
MSCI EM Index Market
Cap: USD4.0trn
Corpus to MSCI EM
aligned based on
weightage i.e. 12%
Corpus allocation to
EM Funds : USD1.0trn
Weightage allocated
to KSA in MSCI EM
Index – 4%
USD40bn
Source: MSCI, Aranca research
Rapid strides toward inclusion in MSCI EM; likely by 2017
The three major criteria to enlist in the EM Index are economic development; having the
requisite size and liquidity; and market accessibility. Saudi Arabia is currently at par with
developed markets with regard to the first two parameters. However, it lags in terms
of market accessibility, particularly openness to foreign ownership and efficiency of
operational framework. In line with the aim to fully liberalize the Saudi market by 1H 2015
and bring it at par with international standards, authorities in KSA are taking steps aimed
at effective governance of market and building a trading technology framework, among
others. Therefore, we believe Saudi Arabia would be a part of the MSCI EM Index in 2-3
years, taking much lesser time than the UAE and Qatar (5–6 years).
CRITERIA FRONTIER EMERGING DEVELOPED SAUDI ARABIA
A. Economic development
Sustainability of Economic development No requirement No requirement GNI per Capita 25% > above World
Bank High Income threshold
DEVELOPED
B. Size and Liquidity Requirements
No of companies meeting the below criteria:- 2 3 5 DEVELOPED
Company size USD 449 mn USD 898 mn USD 1796 mn DEVELOPED
Security size USD 33 mn USD 449 mn USD 898 mn DEVELOPED
Security Liquidity 2.5% ATVR 15% ATVR 20% ATVR DEVELOPED
C. Market Accessibility Criteria
Openness to foreign ownership At least some Significant Very high FRONTIER
Ease of capital inflows/outflows At least partial Significant Very high DEVELOPED
Efficiency of operational framework Modest Good and tested Very high FRONTIER
Stability of institutional framework Modest Modest Very high EMERGING
Opening up of the market illus-
trates its commitment to attract
foreign investors
2008: UAE and Qatar first sought for inclusion in MSCI EM
2013: Announced approval
2014: Finally included
Figure 3: Saudi Arabia standing on par with the developed markets requirements on several parameters
Source: MSCI, Aranca research

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Importance of Saudi
Arabia as an investment
destination
Saudi Arabia has come a long way in terms of developing its stock
market, a crucial determinant to achieving an ambitious target. The
country began to develop its stock market more than a decade ago,
focusing on fundamentals such as transparency, disclosures, insider
trading, and credit control, and recently switched gears focusing on
raising it to international standards. On the economic front, Saudi Arabia
remains the favorite among the G-20 nations, with stable GDP growth,
high fiscal surplus and low debt levels, among others. The Kingdom
scores high on other development parameters such as ease of doing
business, investor protection and raising credit. Moreover, given its
sovereign rating of AA- with positive outlook, the country is better than
many developed and emerging economies. Another interesting aspect
is that KSA is insusceptible to political crisis in the MENA region, as seen
during the Arab Spring.
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Evolution of investment regime in Tadawul indicates strong
commitment to attract foreign capital
Robust institutional and regulatory framework and a proactive policy make Saudi
Arabia one of the most attractive markets for global investors. Since the handing over
of Tadawul’s supervision to a separate body (Capital Market Authority) in 2003, the
operational structure of the capital market has become robust, governance/transparency
has improved, and policymaking has become effective. The Capital Market Authority’s
strategy to transform the stock market, as it looks to gradually open the capital market to
foreign investments, can be summarized in three broad steps:
»» Removing irregularities in procedure and operations of the stock market, and focusing
on the size and depth of the market
»» Paving way for foreign investments, albeit indirectly
»» Undertaking initiatives to complete the liberalization of Tadawul
Figure 4: Development of Tadawul
Source: Capital Market Authority, KSA, Aranca research
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
…Going forward
2014 1H2015 2016 1H2017
⊲⊲ Authority of supervising
the stock market handed
over to CMA(Capital Market
Authority) from SAMA
⊲⊲ A lot of structural rigidities saw the
index reaching an all time high
⊲⊲ Major retail participation contributed to
increased volatility
⊲⊲ Increasingly stretched valuations led
to a severe correction with TASI losing
half its value
⊲⊲ Post correction, CMA adopted
3-pronged strategy; increasing market
size & depth, improving transparency
and rooting out insider trading
⊲⊲ FIIs allowed to participate directly through ETFs
⊲⊲ CMA starts working on regulation to allow QFII
⊲⊲ Full liberalization of Saudi Market and opening up
for foreigners
⊲⊲ Direct market access for
foreign participation
⊲⊲ Potential inclusion in MSCI
Emerging Markets Index
⊲⊲ Change in working days to Sunday-Thursday, brings
it closer to international standards
⊲⊲ Tightening regulations on loss-making companies to
reduce speculations
⊲⊲ Introduction of VWAP mechanism increases
institutional participation
⊲⊲ New corporate governance code
launched
⊲⊲ Foreigners allowed entry through swaps
⊲⊲ Earnings disclosures made mandatory
⊲⊲ FIIs allowed entry through swaps
⊲⊲ IB licenses issued to foreign
banks
⊲⊲ SAMA introduced measures
to reduce personal loan
leverage

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Market begins to stabilize with the pick-up in reforms from 2009
The Tadawul witnessed two major instances of volatility during FY03–09. A number of
structural rigidities led to a run-up in prices which saw the Tadawul All Share Index (TASI)
reach a record high of 20,635, with heavy retail participation cited as one of the reasons
for the considerable volatility. Following the crash that wiped out nearly USD480bn and
reduced the TASI to less than half its value, the CMA wasted no time in adopting a three-
pronged strategy: increasing size and depth of the market, improving transparency and
rooting out insider trading. Having identified the need for foreign institutional participation
to reduce volatility, the authorities turned their focus on removing imbalances in the
market and attracting FIIs. Some of the steps included permitting foreign participation
through swaps, ETFs and changes in regulations to allow QFII. The second instance
was smaller in magnitude and related more to the global financial crisis of 2008. The
reforms that began with the partial opening of the market in 2009 decreased volatility
and culminated recently with the full liberalization of the Saudi market.
0
5,000
10,000
15,000
20,000
25,000
0
500
1,000
1,500
2,000
2,500
3,000
Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14
SASEIDX Index - Volume (unit) SASEIDX Index - Last Price
Figure 5: Reduction in volatility from 2003 with the partial opening of the market in 2009
Source: Tadawul, Bloomberg
Saudi Arabia has sound economic fundamentals
Expected to continue growing at a decent pace
Saudi Arabia’s economy has grown at an impressive rate over the past few years.
Moreover, KSA is among the few countries that remained relatively immune to the global
financial crisis, clocking an average GDP growth of 6%, third only to India and China. The
IMF expects KSA’s real GDP to continue growing at a modest (4–4.3%) but higher rate
than advanced economies (2.3%).
416
520
429
527
670
734 745 773 791 816
850
889
932
6.0%
8.4%
1.8%
7.4% 8.6%
5.8%
3.8% 4.1% 4.2% 4.2% 4.2% 4.2% 4.3%
2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E
Nominal GDP (USD bn) Real GDP % growth
Figure 6: Nominal GDP (USD bn) and Real GDP Growth % growth (2007–19E)
Source: IMF World Economic Outlook Database, April 2014

Favorable demographics key to sustained economic growth
With 65% of its total population below 34 years old (median age: 26 years), strong
demographics is an important underlying strength of Saudi Arabia; this, we believe, is the
key to sustained economic growth. Over the last few years, the Saudi government has
laid emphasis on tapping the potential of its burgeoning youth population by spending
on education and related areas (expenditure on education accounted for nearly 25% of
2013 budget; highest in the world) and simultaneously taking steps to boost employment
in the private sector through various labor reforms.
8.3 8.8 8.9 8.5 8.3 8.1 7.9 7.7 7.4
10.2 10.6 11.3 12.0 12.1 12.3 12.2 11.7 11.5
5.8 7.0 7.6 7.9 8.2 8.6 8.8 9.1 9.4
2.3
3.1
3.9 5.1 6.4 7.0 7.4 7.7 8.1
0.8
1.0
1.4
2.0
2.6 3.5 4.7 6.0 6.8
2010 2015E 2020E 2025E 2030E 2035E 2040E 2045E 2050E
PopulationinMn
0 to 14 15 to 34 35 to 49 50 to 64 65 & Above
Figure 7: Favorable demographics for sustained economic growth
Source: World Bank Database
Fiscalsurplus,despiteexpansionaryspendingpolicy,ledbyinfluxofpetrodollars
Saudi Arabia is expected to record a fiscal surplus for the fifth consecutive year in
2014 due to high oil prices and growth in oil production—oil revenues are expected to
total USD329bn. This has enabled the Saudi government to maintain an expansionary
fiscal policy to diversify the economy from oil. Therefore, despite the economy’s heavy
dependence on oil revenues, the non-oil sector’s contribution to GDP has risen steadily,
standing at 53% currently from 44% in 2008.
194
315
154
219
318
369
331 329
131
151
172
208
238
262 269 274
2007 2008 2009 2010 2011 2012 2013 2014E
Government Revenue (USD bn) Government Expenditure (USD bn)
Figure 8: Government revenue and expenditure
101 109
127
144
155
184
219
131
151
172
208
238
262 269
2007 2008 2009 2010 2011 2012 2013
Budgeted (USD bn) Actual (USD bn)
Figure 9: Budgeted vis-à-vis actual spending

Saudi Arabia’s current account balance (CAB) is one of the largest in the world due to
its dominance in oil export. The country’s CAB, as a percentage of GDP, of 17% is well
above that of developed economies such as the US (-2.7%) and UK (-3.8%) as well as
emerging markets such as Brazil (-2.4%), China (2.3%) and India (-4.9%). Saudi Arabia has
also brought down its debt to low single digit over the years; it currently stands at just
3% of GDP.
211
233
313
192
251
365
388 376
70
90
115
96 107
132
156 168
0%
5%
10%
15%
20%
25%
30%
2007 2008 2009 2010 2011 2012 2013 2014E
Exports (USD Bn) Imports (USD Bn) CAB (% of GDP)
Figure 10: KSA’s CAB one of the highest in the world
71
63
60
45
36
26
20 20
17%
12%
14%
8%
5%
4%
3% 3%
2007 2008 2009 2010 2011 2012 2013 2014E
Public Debt (USD bn) As % of GDP
Figure 11: KSA’s debt levels reduced drastically
Investor-friendly environment enhancing competitive strength
Saudi Arabia has a higher sovereign rating than most emerging markets; this reflects its
strong fundamentals. S&P has given Saudi Arabia an ‘AA-’ rating with a positive outlook,
just three notches below the maximum possible rating of ‘AAA’. Moreover, KSA scores
better in terms of ease of doing business, with strong investor protection laws and high
availability of credit, among a host of parameters. The raising credit parameter reflects the
collateral and bankruptcy laws that support lending and borrowing, whereas the investor
protection parameter indicates strength in three areas: extent of disclosure, extent of
director liability and ease of shareholder suits.
Prime – High Grade
(AAA to AA-)
Medium Grade
(A- to BB-)
Speculative Grade
(B+ to CCC-)
Figure 12: KSA’s sovereign rating just two notches
below highest
6 7
16
23 26
41
48 53
71
92 96
109
116
126
134
Figure 13: KSA among the most business-friendly
economies in EM
1
13
28 28
42
55
73 73 73
83 83 86
109 109
130
Figure14:GettingcreditinKSAeasiestinMENA(rank133)
4
10
22
34 34
52
68 70
80 82
98 98 98
115
128
Figure 15: KSA offers strong investor protection
Source: S&P, World Bank, Rankings taken from Ease of Doing Business Report 2014

Unaffected by social unrest in MENA
Saudi Arabia was largely unaffected by the Arab uprisings that swept the MENA
region. This was mainly due to the Saudi government’s ability to satisfy the needs of its
population. The Government of KSA implemented major labor reforms in 2011 that led to
an increase in employment as well as salaries of nationals, ensuring stability. Factors such
as economic development, satisfaction with the system of governance and emerging
nationalism have held the nation together during turmoil and otherwise; consequently,
investors are more confident about stability in the Kingdom.
Saudi Arabia
Oman
UAE
Iraq
Iran
Jordan
Algeria
Lebanon
Kuwait
Morocco
Bahrain
Yemen
Egypt
Libya
Tunisia
SyriaRegime dethrone
Civil war
Major protests
Governmental reforms
Minor Protest
No Impact
Figure 16: Impact of Arab Spring in MENA (Saudi Arabia vis-à-vis other countries)
Source: Aranca research

Tadawul providing a
level playing field among
many G-20 economies
Despite Saudi Arabia being an oil export economy, it offers investment
opportunities across several non-oil sectors such as petrochemical,
banking, telecom, food, retail, among others. We believe these
opportunities would continue to increase as the country diversifies its
economy further. The Saudi stock market (Tadawul) is fairly liquid and
the most active IPO market in the MENA region, both in terms of value
and listings. With just 169 listings, the market has an average monthly
turnover of USD49.5bn—over 68 stocks (or 40% of total) have a market
cap of more than USD1bn (and around 100 stocks with market cap of
USD0.5bn or more); this places it above the stock markets in several
G-20 nations. Furthermore, due to its low correlation with emerging
countries, the Saudi stock market provides investors with diverse options.
Therefore, we expect it to continue trading at a premium to the advanced
and emerging market group averages.
3

Economic diversification creating investment opportunities
across sectors
Saudi Arabia is an oil-driven economy, with the oil segment contributing more than 85%
to total revenues and approximately 47% to the Kingdom’s GDP. However, all companies
in this space are unlisted. Hence, the Saudi stock market provides investors exposure to
only non-oil companies across diverse sectors such as petrochemicals, financial, food,
retail, among others. There are 169 listed companies in the Saudi stock market, with the
financial sector having the highest free flow weightage, followed by petrochemicals and
telecom. We believe further diversification of the economy would unlock more growth
potential in the non-oil segment and benefit investors.
Saudi stock market above several G-20 peers
With an average monthly turnover of USD49.5bn, the Tadawul is at par with most G-20
peers; in fact, it is competitively placed with the likes of Brazil, South Africa and Russia.
The Saudi stock market’s share turnover velocity ratio is 1.1 vis-à-vis Brazil’s 0.57 and South
Africa’s 0.23. Furthermore, the Saudi stock market is fairly deep, with over 100 companies
(or 59%) and more than 68 companies (or 40%) of the total 169 having a market cap above
USD0.5bn and USD1bn, respectively. This is higher than the peer group average of 34%
and 24%, respectively. Therefore, attractive blue-chip offerings and market depth make
Saudi Arabia a lucrative destination for investments.
Non-oil
Oil
KSA Oil and Non-oil GDP No of Listed Cos. Avg. TurnoverFree Float Wt.
Financial Services
Food & Retail
Industrial
Construction
Cement
Petrochemicals
Telecom/IT
Metrics of Key Sectors in TASI Banking Petrochemical Food & Retail Construction & Cement Telecom
Sector Revenue (USD bn) 14.7 80.9 19.2 9.9 20.7
MCap as % of GDP 15% 21% 7% 5% 3%
Free Float MCap (USD bn) 61.4 51.1 28.7 25.1 10
No of Listed Cos 11 14 30 30 5
Daily Turnover (USD mn) 247 373 352 211 160
Volume as % of Total TASI 13% 16% 9% 8% 12%
Figure 17: Non-oil segment provides ample opportunities for investors
Source: Tadawul, Bloomberg

Country Stock Exchange MCap (USD
bn)
Avg turnover
(USD bn)
Share turnover
velocity ratio
No of Listed
Cos
No of Cos
MCap>USD 1
bn
No of Cos
MCap>USD
500 mn
Italy Borsa Italiana 698 83.3 1.25 360 80 101
Brazil BM&F Bovespa 1,100 55.7 0.57 369 117 160
Saudi Arabia Tadawul SE 530 49.5 1.1 169 68 100
Turkey Borsa Istanbul 223 31.4 1.8 231 40 72
South Africa Johannesburg SE 1,028 28.3 0.23 375 86 118
Russia Moscow Exchange 735 23.3 0.33 251 52 71
Mexico Mexican Exchange 530 13.1 0.3 142 68 84
Indonesia Indonesia SE 408 8.3 0.19 496 75 124
Argentina Buenos Aires SE 56 0.3 0.09 104 11 20
Average 590 32.6 0.65 277 66 94
Figure 18: Tadawul – Provides an excellent depth to investors
Source: Bloomberg, Aranca research
Robust IPO activity
Saudi Arabia is the largest IPO market in MENA, with 37 listings over the last five
years (2009–13), followed by Tunisia (23) and Oman (8). It is also the biggest in terms
of proceeds raised (USD5bn vis-à-vis USD0.5bn in Tunisia and USD1.2bn in Oman). Al
Hammadi Company for Development and Investment (in the retail sector) was the last
of the four IPOs in 2014 raising a total USD533mn (higher than USD523mn last year).
We believe the potential remains strong, with more than 35 family-owned businesses
in discussions with advisors for IPOs, and National Commercial Bank (NCB), the largest
Saudi bank, likely to go public later this year. Al Rajhi, the second largest bank after NCB,
has a market capitalization of USD30bn.
Figure 19: Saudi Arabia, largest IPO market in MENA (2008–14 YTD)
Source: Zawya, Aranca research
9,705
1,035 1,022
460
1,420
523 533
13
11
9
5
7
5
4
2008 2009 2010 2011 2012 2013 YTD 2014
Size of Offerings (USD mn) No. of IPOs
2008 2009 2010 2011 2012 2013 YTD 2014
Construction Consumer Goods Financial Services Food and Beverages Health Care Industrial Manufacturing Leisure and Tourism
Mining and Metals Petrochemical Real Estate Retail Telecommunications Transport

An attractive alternative to riskier emerging markets
Saudi Arabia’s stock exchange provides significant diversification-related benefits to
global investors due to its low correlation of 27% and 47% (1-year and 3-year) with the
MSCI EM Index. Separately, Tadawul has a negative to low correlation with Russia, China,
Brazil and South Korea. However, its correlation with the US market is high at 87–94%,
given the dollar peg; we believe this bodes well for investors willing to bet on safe-haven
dollar-denominated investments, as seen during the emerging market currency turmoil.
96.8% 96.1%
92.8% 90.9%
86.7%
61.6%
47.3%
-62.0% -53.4%
13.7%
22.3%
90.0% 93.4%
94.6% 95.9%
93.9%
93.7% 91.3%
83.1%
26.8%
-53.6% -60.5%
-43.2%
54.2%
90.8% 92.5%
Qatar Dubai Abu Dhabi S&P DJIA FTSE MSCI EM Russia China Brazil Korea Taiwan South
Africa
1 Yr Correlation 3 Yr Correlation
Figure 20: Diversification benefits due to low correlation with MSCI EM

Strong fundamentals, growth potential warrant premium
valuation
The Saudi stock market’s return on equity (ROE) currently stands at 13%, higher than
that of MSCI EM and MSCI ACWI (12% each). Furthermore, according to the consensus
estimate, the earnings of listed Saudi firms would grow 13% in 2015, at a higher pace than
the expected 11% average for both emerging as well as advanced economies. Also, at
3%, the Tadawul’s dividend yield is higher than the 2.5–2.7% range for both MSCI EM and
MSCI ACWI. We believe these factors, coupled with strong macroeconomic fundamentals,
justify the premium valuation of 20x for the Saudi stock market versus 17x for MSCI ACWI.
US
China
Japan
Germany
France
UK
Brazil
Russia
India
Canada
Australia
Mexico
Korea
Indonesia
Turkey
Saudi Arabia
Argentina
South Africa
3%
6%
9%
12%
15%
18%
3.0x 6.0x 9.0x 12.0x 15.0x 18.0x 21.0x 24.0x 27.0x
ROE
P/E multiple
Figure 21: Saudi Arabia’s position among key developed and emerging countries
Size of the bubble
represents MCap

Other markets
performed well after
liberalization
Emerging markets such as India, Dubai and Qatar have witnessed positive
results in the form of increase in market capitalization, investments and
market activity after being opened to foreign institutional investors (FIIs).
While the Indian market benefited from improved trading infrastructure
and better corporate governance, which attracted a lot of FIIs, trading
activity across the UAE and Qatar indices surged following their inclusion
in the MSCI EM Index. Nine UAE and Ten Qatari stocks were included
in the MSCI EM Index, which witnessed higher foreign participation in
related sectors as well as increased foreign ownership in these stocks.
The Government of Qatar raised the FOL to 49%; this is expected to
result in higher foreign inflows and increase the weightage of Qatari
stocks on the MSCI EM Index.
4

India: Stock market mainly driven by FIIs
Like Saudi Arabia, other emerging markets witnessed a boom in investments and market
capitalization after opening their doors to FIIs. India’s Sensex moved up to 26,000 from
merely 2,000 in two decades due to huge foreign participation. The Indian market
rose significantly after 2003 owing to the massive inflow of FII money following the
development of trading infrastructure and improvement in corporate governance.
4-Jan-93 3-Mar-95 29-Apr-97 26-Jun-99 22-Aug-01 19-Oct-03 15-Dec-05 11-Feb-08 9-Apr-10 5-Jun-12 2-Aug-14
Volume (mn) Sensex
1993-94 1995-96 1997-98 1999-00 2001-02 2003-04 2005-06 2007-08 2009-10 2011-12 2013-14
Turnover (INR cr) FII stake (%)
Figure 22: India: FII driving movement in index and volumes
Source: Bloomberg, Bombay Stock Exchange, National Stock Exchange, Aranca research
UAE and Qatar: Included in MSCI EM Index in May 2014
Trading activity surges, foreign ownership rises in selected stocks in UAE
The UAE index rose significantly, while trading activity increased nearly fourfold after the
country was included in the MSCI EM Index, the process for which began a year earlier
in June 2013. Notably, Dubai Financial Market (DFM) reached a five-year high in May
following the news of inclusion. In June 2014, four stocks of the Abu Dhabi Securities
Exchange (ADX) – First Gulf Bank, National Bank of Abu Dhabi, Abu Dhabi Commercial
Bank and Aldar Properties – and five stocks of DFM – Arabtec, DP World, Dubai Financial
Market, Dubai Islamic Bank, and Emaar Properties – were included in the MSCI EM
Index; this led to higher foreign participation in banking, financial services and real estate
sectors.

01-Jan-12 01-Apr-12 01-Jul-12 01-Oct-12 01-Jan-13 01-Apr-13 01-Jul-13 01-Oct-13 01-Jan-14 01-Apr-14 01-Jul-14
Volumeinmn
Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14
ADSMI DFMGI
Volumes quadrupled after
including in MSCI EM
Figure 23: UAE: Trading improves significantly after MSCI EM inclusion
Source: Bloomberg, UAE Stock Exchange websites, Aranca research
13.96%
15.41%
16.02%
15.88%
16.54%
20.52%
20.82%
21.13%
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jun-14
08-08-2014
2.76%
2.74%
4.26%
6.33%
6.89%
8.49%
8.98%
9.90%
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jun-14
08-08-2014
5.54%
5.73%
5.02%
4.96%
3.72%
3.66%
5.40%
5.31%
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jun-14
08-08-2014
8.66%
7.91%
9.62%
9.07%
8.78%
9.23%
11.07%
10.57%
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jun-14
08-08-2014
2.35%
3.10%
3.02%
3.03%
3.05%
3.03%
3.61%
3.68%
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jun-14
08-08-2014
11.96%
10.72%
13.09%
12.25%
13.67%
14.53%
17.35%
17.98%
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jun-14
08-08-2014
14.73%
14.90%
15.18%
15.19%
15.06%
14.65%
14.64%
14.96%
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jun-14
08-08-2014
7.32%
7.04%
7.39%
7.71%
8.79%
8.76%
9.00%
9.19%
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jun-14
08-08-2014
Abu Dhabi Commercial Bank
National Bank of Abu Dhabi
Dubai Islamic Bank
First Gulf Bank
Arabtec
Emaar Properties
Aldar Properties
Dubai Financial Market
Figure 24: UAE: Increase in foreign shareholding in companies included in the MSCI EM Index
Source: Bloomberg, Stock Exchange website, Aranca research
Qatar performs on similar lines
The Qatar Exchange (QE) index reached a lifetime high of 13,910 after inclusion of 10 stocks
in the MSCI EM Index in June 2014. Furthermore, foreign ownership grew significantly in
selected stocks. Recently, the government’s decision to raise the foreign ownership limit
(FOL) to 49% from 25% for listed companies strengthened investor sentiment. The rise
in FOL is expected to not only help the country witness foreign inflow of approximately
USD440mn but also increase the weightage of the index from 0.47% to 0.62% (higher
than the UAE’s 0.58%) on the MSCI EM Index in the near future.

Jan/12 Apr/12 Jul/12 Oct/12 Jan/13 Apr/13 Jul/13 Oct/13 Jan/14 Apr/14 Jul/14
Volumeinmn
Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14
DSM
Before the announcement,
volumes averaged 90mn
After the announce-
ment, volumes surged
to 201mn
Figure 25: Qatar: Rise in trading value and volume after inclusion in MSCI EM
4.31%
5.39%
5.26%
5.44%
5.82%
5.73%
7.44%
7.87%
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jun-14
08-08-2014
14.67%
13.07%
12.86%
12.72%
14.75%
15.22%
14.72%
15.00%
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jun-14
08-08-2014
14.33%
14.22%
14.06%
14.10%
13.96%
13.43%
16.11%
16.05%
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jun-14
08-08-2014
4.24%
4.52%
5.17%
5.22%
6.00%
6.53%
6.51%
6.58%
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jun-14
08-08-2014
7.04%
8.46%
8.65%
9.08%
8.92%
8.58%
8.79%
8.48%
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jun-14
08-08-2014
3.94%
3.75%
3.56%
3.46%
3.71%
4.35%
5.61%
6.06%
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jun-14
08-08-2014
7.23%
7.20%
7.08%
7.10%
7.37%
8.21%
9.33%
9.62%
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jun-14
08-08-2014
3.78%
3.73%
3.98%
4.08%
4.76%
4.33%
6.82%
6.91%
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jun-14
08-08-2014
6.05%
6.79%
7.40%
8.81%
10.61%
13.32%
12.00%
12.51%
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jun-14
08-08-2014
Doha Bank
Qatar Islamic bank
Al Rayan Bank
Vodafone Qatar
Qatar Industries
Commerical Bank of Qatar
Qatar Electricity & Water
Qatar National Bank
Barwa Real Estate
Figure 26: Qatar: Foreign shareholding in companies following inclusion in MSCI EM Index

Conclusion: Opening
of market to lure huge
foreign investments
5
Saudi Arabia took a landmark decision in July 2014 to allow direct
foreign investment in Tadawul, the largest exchange so far restricted to
outsiders. The Tadawul has a market cap of USD530bn, but a relatively
lower MCap to GDP ratio of 0.71. On one hand, we expect the country’s
solid fundamentals to continue advancing on high oil prices, aided by the
government’s plan to diversify into the lucrative non-oil avenues. Capital
Market Authority, on the other hand, is laying emphasis on bringing up
its stock market reforms/policies/infrastructure at par with international
standards.
The Tadawul’s high credit rating, low correlation with peers in emerging
markets, and relatively higher earnings have made it a favorite among
investors. With monthly turnover averaging USD49.5bn and a velocity
ratio of 1.1, the Tadawul is at par with exchanges in several G-20 countries.
Moreover, more than 40% of companies listed on the Tadawul have a
market cap of above USD1bn (59%+ with MCap > USD0.5bn). It is, in fact,
the most active IPO market in the MENA region. The Saudi stock market

is also fairly diversified across non-oil sectors, and this is expected to
grow as it continues to focus on economic diversification.
Capital Market Authority expects the new rule to take effect some time
in 1H 2015; our back of the envelope calculations suggest that the
market cap could increase by USD150bn if MCap/GDP ratio improves
by just 10bps. In our opinion, this is very significant, especially given
that the Saudi market is likely to be included in the MSCI EM Index in
2017. A quick analysis of India, UAE and Qatar reveals that these nations
significantly benefited – in terms of market activity (volumes, turnover,
index movement) as well as rise in foreign ownership – after opening
their stock market to foreign investors. We foresee the same results for
Saudi Arabia.

Europe, Middle East & Africa
London
93-95 Gloucester Place
London W1U 6JQ
T: +44 (0) 207 487 8214
Americas
New York
275 Madison Avenue, 6th
Floor,
New York, NY 10016
T: +1 212 878 8826
Asia & Rest of World
India
Supreme Business Park,
Hiranandani Gardens, Powai
Mumbai 400 076
T: +91 (22) 3937 9999
www.aranca.com
info@aranca.com
ARANCA DISCLAIMER:
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The information contained in this document is confidential and is solely for use of those persons to whom it is addressed and may
not be reproduced, further distributed to any other person or published, in whole or in part, for any purpose.
This document is based on data sources that are publicly available and are thought to be reliable. Aranca may not have verified
all of this information with third parties. Neither Aranca nor its advisors, directors or employees can guarantee the accuracy,
reasonableness or completeness of the information received from any sources consulted for this publication, and neither Aranca
nor its advisors, directors or employees accepts any liability whatsoever (in negligence or otherwise) for any loss howsoever arising
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Further, this document is not an offer to buy or sell any security, commodity or currency. This document does not provide individually
tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons
who receive it. The appropriateness of a particular investment or currency will depend on an investor’s individual circumstances
and objectives. The investments referred to in this document may not be suitable for all investors. This document is not to be relied
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